Past Recessions Offer Perspective on the Federal Government's Deficit and Debt Problems

July 7, 2011

The federal government's deficit usually rises during recessions, and the depth of the last recession contributed to the red ink.  However, the rise in the deficit this time was extraordinary.  Why did the federal deficit increase so much more during and after this recession than during and after previous recessions?

A new paper from the Institute for Research on the Economics of Taxation (IRET) examines the 10 U.S. recessions since 1950.  It concludes that an upsurge in federal spending is the primary reason for federal deficits of a magnitude not seen since World War II.

  • The federal government was running a budget deficit prior to the recession that officially began in December 2007, but the red ink appeared tolerable relative to the size of the economy.
  • The Office of Management and Budget reports that, as a share of gross domestic product (GDP), the deficit was 1.9 percent in fiscal year 2006 and 1.2 percent in fiscal year 2007.
  • Because real output was growing faster than the debt, federal debt held by the public was actually declining slightly compared to GDP, from 39.6 percent in 2005 to 36.5 percent in 2006 and 36.2 percent in 2007.

Since then, the federal government deficit has exploded.

  • Measured as a share of GDP, the deficit was 10 percent in fiscal year 2009, 8.9 percent in 2010, and an estimated 10.9 percent in 2011.
  • From 2007 to 2011, federal government debt held by the public will have doubled, from 36.2 percent of GDP to an estimated 72 percent.

The huge deficits of recent years, and the consequent mushrooming of debt, are not long sustainable.  The debt crisis that has engulfed Greece illustrates the danger when a government incurs outsized deficits and debt without a credible plan for reducing them, says IRET.

Source: "Past Recessions Offer Perspective on the Federal Government's Deficit and Debt Problems," Institute for Research on the Economics of Taxation, July 6, 2011.

For text:

http://iret.org/pub/ADVS-276.PDF

 

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